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Financial Accounting


Suggestions: 1) Prepare your worksheets in Excel. Excel may aid you in your calculations. 2) Copy your worksheets and schedules and paste them into MSWord. Q.1 Suppose you are considering investing in two businesses, Toby Salmon Inc. & Warwick Inc. The two businesses are virtually identical, and both began operations in January 2014 in Adelaide. During the year, each business purchased inventory as follows: Jan 2 10,000 units @ $5.00 each Mar 6 6,500 units @ $ 5.60 each Sept 15 8,000 units @ $6.10 each Dec 10 9,500 units @ 7.20 each During the year, both businesses sold 26,000 units of inventory. In early January, both purchased equipment costing $150,000. The equipment was expected to be useful for 10 years, at the end of which it would be disposed for $20,000. Toby uses the inventory and depreciation methods that maximises reported profit while Warwick uses inventory and depreciation methods that minimises taxes. The trial balance of both businesses on 31 December 2014 included the following items: Sales Revenue $375,000 Operating Expenses $ 95,000 Required: a) Prepare Income Statements for both businesses in functional format. b) Which business appears to be more profitable? Which business has more cash to invest? Which business would you prefer to invest? Why? Give reasons for each of your answers in your own words. Please show your workings & calculations clearly. Note: The reducing balance rate is calculated at 1.5 times the straight line rate.